The economic contribution of a development finance institution in South Africa : the economic contribution using the discounted economic profit model, and the social contribution using the social output index model

Abstract

Development finance institutions have dual mandates, where they must contribute to development in the economy in which they serve, and simultaneously must maintain financial sustainability. The research explores the dichotomy; studies whether a tradeoff in the dual mandate exists, and goes beyond the traditional accounting approaches to appraising financial performance. The soundness of financial independence of development finance institutions in South Africa has been emphasised by both the national government, through the National Treasury department, and the capital markets from which these institutions borrow. Thus, their ability to create value for their stakeholders is one important aspect to their continued existence. In South Africa, value creation in development finance institutions has not been studied and serves as the primary motivation for this research study. The research has applied a value-based system, McKinsey s discounted economic profit model, to measure value creation or destruction of a development finance institution in its use of scarce capital resources. In addition to this, a theoretical framework has been applied to measure development impact, using the social output index model. The research design followed the holistic case study method, with a sample of one, employing the purposive technique. The findings of this research revealed that value is being destroyed in the deployment of capital resources by the development finance institution, with recommendations thereof proposed. Secondly, the findings revealed that development impact is not maximised, and the results provide insight to decision-makers regarding informed allocation of resources. In exploring the dichotomy between financial performance and development impact, the findings lastly indicated the trade-off relationship can neither be confirmed or refuted, as the results are inconclusive in this regard.